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The Ukraine-Russia War: Russian Ruble and Ukrainian Rubble

Commentary by Trevor Culbertson

This is part two (Read Part One: Tragedy and Conflict Heralds a Schism in Global Payments) of an ongoing series focused on the financial and payments-related repercussions of the invasion of Ukraine by the Russian military.

There has now been over 40 days of war and absolute horror in Ukraine. Sanctions on people and organizations with Russian links continue to expand in depth and breadth, but the underlying assumption of these punishments are being put to the test; do these oligarchs and their businesses, who if stripped of their Western rights and wealth, not only have the desire but even the capacity to influence Putin in any meaningful way? To put this dynamic in some context, less than 0.001% of Russian people have roughly the same amount of wealth as the remaining 99.8% of adult Russian residents.

Since our last article on the war in Ukraine, Russia is now firmly among the most sanctioned countries in the world, counting over 5,500 formal actions against its economy putting the nation on par with Iran, Syria, North Korea, and Venezuela. Key APAC countries have declined to include themselves in the U.N. resolution to condemn Russia, notably China (who also just signed a 30-year trade deal for Russian fossil fuels), India, and Pakistan. South Korea and Japan have enacted sanctions in chorus with the U.N. and are major participants of SWIFT. India’s central bank is also in beginning talks with Russian banks to form a rupee-ruble exchange agreement that would enable India to purchase exports, namely oil and gas, without running into currently defined U.N. sanctions. Such countries appear to be basing this decision on economic reliance, rather than from the point of siding with geopolitical stances like sovereignty. Although relations between Moscow and Beijing appeared rocky at the start of war, it is increasingly looking like a revival of a Sino-Soviet pact.

If we zoom out, a parallel power struggle is happening in the finance and payments spaces. While consumer behavior went through unprecedented changes due to the pandemic, this War in Ukraine looks to prompt changes in the structures and landscapes of many things, least not in payments.

Ukraine and Fintechs

This evolution is being played out in a microcosmic way in Ukraine, from SpaceX-provided internet access and shortwave radio use as vital communication channels, to the use of crypto as a P2P and retail payment method, and a huge surge in popularity of international money transfers that are not ACH or bank-linked.

Monetary support to both Ukrainian institutions and its people has come in the volumes it has due to both the generous and knowingly risky investments into the country’s military and civilian economies. However, credit goes to the quick adaptation and strong fintech ecosystem of Ukraine that made the massive and diverse influx of capital possible while facing technical and legal hurdles. This includes President Zelensky passing legislation that allows cryptocurrency exchanges and other blockchain enterprises to register and operate in Ukraine, and perhaps more importantly permit Ukrainian banks to have accounts with cryptocurrency firms. The costs associated with opening traditional wealth and payment vehicles up to crypto was the reason Zelensky vetoed similar legislation last year. A preview of what’s to come in crypto regulation can be found in Ukraine’s National Securities and Stock Market Commission, who are now the policy regulators for digital assets, including crypto. While it’s difficult to estimate, it’s reported that tens of millions of USD-equivalent crypto donations have been sent to Ukrainians, and nearly 10 million alone to humanitarian needs. However, the demolition of Ukraine’s infrastructure has certainly limited internet access and electricity; two requirements of receiving crypto.

The private sector has also made important moves in ensuring their country keeps afloat financially. The nation’s largest challenger bank, Monobank, started accepting SEPA (Single Euro Payments Area) instant bank transfers for those wanting to help fund the army. Ukraine’s own DAO (decentralized autonomous organization), pooled together over $6 million in a NFT that will be donated to nonprofits in the country, and Unchain Fund, a worldwide crypto charity, digitally distributed a virtual debit card to women and children affected by the war that can be utilized for business and ATM transactions. A similar scheme has been set up by Bitsafe, who offers access aimed particularly at recent Ukrainian diaspora. EvoShare, a Silicon Valley cash-back solution started by Ukrainian natives, offers its users the ability to donate a percentage of their points to Ukrainian relief initiatives.

PayPal recently announce that they had formed agreements with Mastercard and Visa, and in turn Ukrainian banks, to allow their customers with PayPal accounts to send and receive money by linking a debit and/or credit card that can be utilized to place funds in their bank accounts, previously only available for PayPal users to send money with. Additionally, all fees are waived for any transfers into Ukrainian PayPal and Xoom (PayPal’s international remittance solution) accounts. Both of these changes came as a fulfilled request by the Ukrainian Central Bank and as PayPal effectively shuts down all services in Russia. Additionally, Mastercard has donated over $2 million to humanitarian agencies in and around Ukraine. Even considering this wave of support and investment in Ukraine, there is sure to be a real fear that eventually financial panic will set in and foreign capital influxes will stumble.

Cards and Transfers

Russia’s biggest card issuer, Sberbank, had recently positioned itself into the top 10 of European issuers by volume while Ukraine’s own PrivatBank recorded over 400 million transactions in 2021 as it had become a bigger and bigger player in the European merchant acquiring space. While Russian exposure appeared to be low for Visa, they had previously partnered with Luna POS and Sberbank on a smart pos terminal with facial recognition payment authorization.

Visa and Mastercard had the lion’s share of users in Russia (approx. 75%) prior to sanctions, and combined with the fact that Russia’s own network, Mir (in Russian refers to both a medieval peasant community and a retired Soviet space station), is relatively new and unproven, provides for a volatile marketplace for card issuers in Russia and its remaining business partners. Mir was created in 2014 because it was feared that the international sanctions at the time could eventually expand to exclusion from Western card brands like Mastercard and Visa.

A new landscape of more emboldened issuers outside the U.S. and Europe looks to develop and Russia so far has proven resilient in keeping domestic payment systems afloat. The prep work that has been done has not only shifted payment volumes in all methods from foreign rails to Russian rails, it has as a result become a contributor to the overall increasingly insular Russian economy. This includes roughly 197 million Mastercard or Visa cards that were in Russia at the start of 2021, which had already been on the National Payment Card System (NSPK), Russia’s central banks own card processor. And while dollar volumes in Mir are still assumed to be relatively low compared to Visa and Mastercard, over a 100 million Mir-branded credit and debit cards have been issued by banks since 2015.

It appears Russian Visa and Mastercard users have had less issues than predicted on using their cards domestically, but as competition grows there will certainly be attrition to Mir, UnionPay, and others. Major international card brands like India’s RuPay and China’s UnionPay, in addition to Russia’s Mir will be able to absorb users that have or ultimately will leave Mastercard and Visa. There are also already new entrants in the international payments game. One is Nium, which in March announced a new payments solution for overseas financial institutions (FIs) who deal with U.S. equities and claim up to 90% lower costs compared to SWIFT. Nium functions in over 190 countries, of which 85 have transactions in real time and has an expanding card issuing side that is already offered in Europe, Singapore and Australia.

Debt and Energy

Russia’s foreign debt obligations have so far remained propped up as they continue to fulfill their interest payments, even as the U.S. has frozen debt fulfillment in dollars, which as it stood in Q3 2021, was approximately 53% of Russia’s debt. Ironically, the complicated mess that Russian firms must now operate within in order to interact with most Western institutions has made it difficult to pay out coupons and other obligations to bond holders in sanction-issuing nations. Defaulting on foreign loans, which hasn’t happened since 1918 amidst the Bolshevik revolution, would further pull down projections that Russia’s economy could be half its pre-war size by the end of 2022, according to Daleep Singh, the Deputy National Security Advisor for International Economics and the “architect” of U.S. sanctions against Russia. In the long-term, multiple reports predict this war will ultimately put Russia back 30 years.

It doesn’t help Russia either that the EU has proposed halting coal imports from Russian companies, which would be a first in energy sanctions from Western Europe that look to expand to other fossil fuels. Regardless of sanction-proofing measures Russia had installed, depleted revenues from Europe will have consequences for both Russia’s export-dependent energy businesses and EU economies. Never mind the disruption in major exports like wheat or vegetable oils, of which 30% come from Ukraine and Russia and 80% travel through the Black Sea, respectively. Both energy and food disruptions further hurt their chances of keeping hard April deadlines for debt payments that, according to a Russian official, must be fulfilled using either new revenue or precious USD reserves. EU members are also contemplating moving in on the remaining untouched Russian banks, who were included in sanctions by the U.S. and SWIFT. There aren’t universal steps from all of Europe though, as Hungary recently announced they would still pay in rubles for Russian gas.

Meanwhile, there are still no plans to delist Gazprombank or Sberbank, which handle energy payments to Russia from European businesses. So far, the EU has not imposed bans on energy imports such as gas, coal and oil from Russia. And even though focus has been primarily on sanctions against Russia and its debt holders, what could prove vital to the cessation of this war is providing support in relieving Ukraine’s debts, which in the U.S. stand at $28 billion to private creditors and $790 million to public agencies. While energy trade disputes and foreign bond payments are not necessarily correlated with consumer payments activity, they can act as geopolitical standards for which other major industries look to act accordingly.

As of writing, Russian forces seem to be strategically retreating but few surely expect them to leave Ukraine any time soon. The understandable and in many ways astute comparisons with the Cold War; that we’ve entered either a New Cold War or Something Entirely Different, could very well prove true. Payments and other fintech firms may want to fully consider how the Western world will be dichotomously more open and yet also more insular for the foreseeable future.

The above is just a small sample of the ongoing developments and unprecedented changes that have come to fruition and will continue to in the coming weeks, months, and years as the first major war in Europe since WWII has been sparked by Russia.

Sources: TSG, Bloomberg, The Economist, Associated Press, Reuters, Moscow Times, CNBC, Wall Street Journal, PR Newswire, PYMNTS, Finovate